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Defaults and loss rates on home equity loans remain paradoxically low compared with those of first mortgages. The counterintuitive trend suggests that the staggering losses many had expected the industry to suffer on second liens will not come to pass.
March 9 -
House Financial Services Chairman Barney Frank urged four of the nation's top banks to adopt principal writedowns on second-lien mortgages to allow borrowers to keep their homes.
March 8
As an alternative to foreclosure, the government's forthcoming program to spur short sales may prove just as ineffectual as the push to modify loans.
In a short sale, the borrower sells the home for less than the amount owed on the mortgage and the lender accepts a discounted payoff. They can be far less costly to the lender than foreclosures.
But experts in such transactions say second-lien holders have scuttled many deals by reserving the right to chase after the borrower for the amount of debt not covered by the home sale in states where doing so is allowed.
"Subordinate lienholders are the biggest obstacle to successful short sales," said Travis Hamel Olsen, the chief operating officer at Loan Resolution Corp.
The Home Affordable Foreclosure Alternatives program, which starts next month, will attempt to change that. To give junior mortgage holders an incentive to release their liens and waive any future claims against the borrower, the government will offer up to 3% of what they are owed, subject to a cap of $3,000 per home.
But that carrot may not be enticing enough. According to Olsen — whose Scottsdale, Ariz., company specializes in arranging short sales — second mortgage holders have been asking defaulted homeowners to come up with additional funds to bring the payoff on home equity loans to 6% of the unpaid principal.
Other parties would receive incentives under the Treasury Department's plan.
The servicer of the first mortgage, which acts as a go-between for the many parties involved in a short sale, would get $1,000 for each one that is completed. Borrowers would receive $1,500 to cover moving costs. The program is intended to help borrowers who do not qualify for the Home Affordable Modification Program, or who receive mods but redefaulted.
Since Hamp's inception a year ago, 88,663 trial mods and 1,499 permanent mods have been canceled, according to the Treasury. As of Feb. 28, 168,703 households had permanent loan modifications and 835,194 were in a "trial," so any of these 1 million borrowers who are unable to continue with loan modifications would be eligible for a short sale.
Some experts joke that short sales are a bit like herding cats, because there are several parties that must sign off on a deal. The holders of the first and second liens, the homebuyer, the seller and the mortgage insurer all have the power to kill a deal.
The Treasury program has garnered praise for attempting to streamline this cumbersome process.
"What Treasury did is put in a protocol … so they have a preapproved short sale," said Ron Bergum, the chief executive of Prospect Mortgage LLC in Sherman Oaks, Calif. "What this does is it makes the transaction mainstream, because there's a protocol in place that the government has outlined."
Olsen agreed. He said the program guidelines, which the Treasury released in November, have "done two very important things for the industry, which is attempt to standardize the short-sale process and provide structured time lines."
In other words, HAFA dictates that certain things have to be done in certain amount of time. So, for example, a borrower has 14 calendar days to contact a servicer after they have been notified that they are eligible for a short sale.
Just as the largest servicers created their own in-house loan modification programs for borrowers who did not qualify for the government's loan mod plan, the same is likely to hold true for short sales.
"HAFA will get the process started," Olsen said.
Because it can cost the holder of the first mortgages $30,000 to $50,000 to foreclose on a home, plus carrying costs that equal 1% to 1.25% in lost value each month, short sales are often far less costly than foreclosure.
Other obstacles remain. Mortgage insurers, for example, are taking a similar approach as the second-lien holders. They also are asking defaulted borrowers to pay them out of pocket to cover a portion of their losses in exchange for signing off on a short sale, Olsen said.
The HAFA guidelines say a mortgage insurer must waive any right to collect additional sums from the borrower for a mortgage to be eligible for the program.
Tom Taggart, a spokesman for PMI Group Inc., a Walnut Creek, Calif., mortgage insurer, said most insurers are confident in the government's short-sale process because borrowers have already been vetted. The main differences between HAFA and any other short sale are: the borrower has been preapproved for a short sale because he or she has already been analyzed by the servicer for Hamp and turned down or fell out; and holders of second liens agree not to pursue the borrower later.
"We've never had any interest in going after a borrower that does not have the capacity to pay," Taggart said. "What we're interested in is seeking payments from borrowers who have the capacity to pay but choose not to. There has to be a level of responsibility."
Joe Filoseta, the president and CEO of DepotPoint, a Bellevue, Wash., provider of default management technology, said servicers and investors are trying to identify borrowers who are the best candidates for short sales.
"You address the loans that are not held back by second-lien holders that won't negotiate," Filoseta said. "The existence of a second is not an end-all. There is a definable group of candidates that will not be hampered by non-negotiating second-lien holders. So let's do those well and have the borrower exit with dignity."
